China Dealerships Flex Their Muscles

A BMW dealership in Beijing.

Photographer: Yves Chan You for Bloomberg Businessweek

When Carson Guo set up his dealership for BMW’s Mini brand two years ago, he had to follow BMW’s every command concerning how much he had to invest, the size and location of the two-story showroom, even what paint colors he should use. He ended up putting 82 million yuan ($13.2 million) into the first independent Mini store in Beijing. Guo says he was told by then-BMW management that the company wouldn’t approve any other dealerships in Beijing within about five years, which would have let him break even in about three years. It didn’t turn out that way.

“There are so many Mini stores in China now, and dealers have to cut prices to sell cars,” says Guo, who estimates he’s lost more than 20 million yuan since opening his store. “Selling cars is costing us money instead of helping us make money. If automakers are not helping us out here, their interests will ultimately be undermined.”

China car dealers are in open revolt over industry practices that have slashed profits, threatening growth for companies such as General Motors and Volkswagen in the world’s biggest auto market. The retailers have banded together under the state-backed China Automobile Dealers Association (CADA) to demand lower sales targets and a bigger share of profit from vehicle sales. BMW on Jan. 4 agreed to pay 5.1 billion yuan to its dealers (who say it will include bonuses and one-time payments to help with dealership losses), a move that has emboldened distributors for VW and Toyota Motor to press for similar concessions.

The rising tensions mean companies such as VW and GM face the choice of narrower profit margins or slower growth in China, a market that increasingly determines global carmakers’ fortunes. Total vehicle sales in China in 2014 rose 6.9 percent, half the pace of the preceding year.

China’s vehicle sales are set to rise 7 percent this year, about the same rate as in 2014, because of cooling economic growth and as more cities impose quotas on new-vehicle registrations to fight smog, says the China Association of Automobile Manufacturers.

“We can’t just keep on sucking it up,” says Richard Li, a Toyota dealership owner who lost about 300,000 yuan last year after offering markdowns of as much as 16 percent on some models. “We have to negotiate with them and defend our rights. I will stop buying cars from them unless they step up their financial support.”

Almost all the country’s dealerships are offering discounts and selling some models at losses to meet carmakers’ sales targets, according to a survey by the China Auto Dealers Chamber of Commerce. Dealers must meet those targets to qualify for yearend bonuses, which typically are less than 10 percent of the value of total sales. They account for more than half of dealers’ annual profits from selling cars, the trade group says.

“When auto sales were booming in China, dealers would do anything the automakers asked them to do in order to gain their authorization to sell cars,” says Han Weiqi, an analyst with brokerage CSC International Holdings. “With the expected slowdown in demand growth, manufacturers and dealers will have to find a way to make peace and secure their common interests.” BMW in an e-mail said it has reached an understanding with its dealers in China and can’t comment on individual cases.

CADA, the dealer association, is asking FAW-Toyota Motor Sales, a joint venture between Toyota and China’s FAW Group, for 2.2 billion yuan in subsidies to help offset the cost of dealers’ excess inventory. Ma Chunping, an FAW-Toyota spokeswoman, didn’t respond to a request for comment. “Vehicle demand growth has been falling, and dealers have been taking the hit,” says Song Tao, a deputy secretary-general of CADA. “Dealers need to make a living as well.”

Talks were held in early January between dealers selling imported VW models and the automaker, according to CADA. VW sold more than 10 million vehicles for the first time in 2014, reaching the milestone four years earlier than originally targeted, because of its strong car sales in China. VW believes in having a financially sound dealer network as “satisfied dealers create satisfied customers,” spokeswoman Larissa Braun in Beijing said in an e-mail.

Chinese dealers’ fortunes are unlikely to improve anytime soon, says Ole Hui, a Hong Kong-based analyst at Mizuho Financial Group. He predicts profit margins at Chinese dealerships will shrink by more than half, from about 9 percent in 2011 to 4 percent this year. “They were printing money,” Hui says of auto distributors in China. “Those kinds of margins were never sustainable.”

The bottom line: BMW in January said it will pay $823 million to its dealers in China. Other brands are being pressured for similar payouts.

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